Standard & Poors Damages U.S. Economy

by John M. Curtis
(310) 204-8700

Copyright August 8, 2011
All Rights Reserved.                                         

             Downgrading the U.S. credit rating from AAA to AA+ after the market closed August 6, Standard & Poors damaged the U.S. economy without consultation with the White House or Congress.  Justifying their draconic move, S&P explained that the political climate in Washington gave them no other option other than the downgrading U.S credit.  Acrimony between warring political parties Washington predates last week’s downgrade and should have nothing to with an assessment of whether the U.S. government can repay its debt.  Billionaire investor Warren Buffett took exception to S&P’s downgrade, suggesting that if their were a fourth A, as in AAAA, that would more fairly characterize the U.S. government’s credit rating.  Buffett, whose company Berkshire Hathaway holds 28 million shares of S&P, said a downgrade may change his opinion of S&P.

            S&P is the same company that had no problems rating Bear Stearns AAA in March 2008 before JP Morgan Chase bought the nearly 90-year-old investment bank for only $10 a share.  S&P routinely rated dot-com companies AAA before the dot-com bubble burst and companies went under.  They were the same company that rated Enron AAA before it went broke in 2001.  They had no problem giving now bankrupt WorldCom and Global Crossing AAA ratings before they went bust in 2001-02.  S&P’s arbitrary decision to downgrade U.S. debt caused the sixth largest drop in the Dow Jones Industrial’s history.  By the time markets closed Aug. 8, the Dow had dropped over 634 points or 5.5%, losing trillions in stock market wealth.  “Our currency is not AAA, and in recent months the performance of our government has not been AAA, but our debt is AAA,” said Buffett rejecting S&P’s actions.

            Moody’s and Fitch’s rating services saw no reason to follow suit.  As long as the U.S. government remains sovereign and prints it own currency, Buffett sees no basis for downgrading U.S. debt.  Only a country that could run out of cash, like Greece, should have credit downgraded.  Speaking to the nation today to calm markets, President Barack Obama said, like Buffett, he believes the U.S. credit is AAA.  “We didn’t need a rating agency to tell us that we need a balanced long-term approach to deficit reduction,” said Barack.  “That was true last week.  That was true last year.  That was true when I took office,” questioning the timing and advisability of S&P’s rationale behind the downgrade.  No one disagrees that the political parties bicker too much but using political infighting as an excuse to downgrade U.S. credit goes over the top.  As Buffett points out, there’s no risk to the U.S. paying its debt.

            Whether you agree or disagree with S&P’s downgrade, it goes beyond a credit bureau’s bailiwick to comment about politics.  It’s inappropriate for a credit-reporting agency to comment on anything other than the ability of the U.S. government to pay its bills.  Last Friday’s downgrade hurts both Democrats and Republicans. It hurts Obama by drawing more bad publicity to his management of the economy.  It hurts Republicans because the Tea Party is being seen as risk-taking obstructionists.  Tea Party loyalists like House Minority Whip Eric Cantor (R-Vir.) urged his caucus to reject the bipartisan debt-ceiling compromise which would have sent the government into default.  While such problems exist on Capitol Hill, S&P should keep its nose out of politics and stick purely to the economic facts.  As long as the U.S. has the Federal Reserve, no U.S. obligation will go unpaid. 

            Obama let his treasury secretary Tim Geithner to go on the attack.  He said that S&P used “terrible judgment” in lowering the U.S. credit rating. Given the fragile state of the economy and stock market, Geithner couldn’t fathom why S&P’s executive Board acted unilaterally without consulting the White House, Congress or Federal Reserve Board. Moody’s and Fitch’s decision to not downgrade U.S. credit shows that S&P acted arbitrarily.  While they no doubt have their reasons, honest credit agencies saw no need to downgrade U.S. credit.   White House and Congressional officials must look carefully into S&P’s actions.  No U.S.-based corporation should be given so much power to hit the economy with a wrecking ball.  As Buffett points out, S&P should not be assigning grades based on politics.  Geithner said S&P showed a “stunning lack of knowledge” about the basic math in the U.S. budget.

            S&P’s unilateral and arbitrary decision to downgrade U.S. credit must be carefully investigated.  Whatever factors led to their decision, the government has a vested national security interest to prevent any U.S. company from harming the U.S. economy.   If S&P wishes to make political statements about what’s wrong with Washington, they shouldn’t be downgrading U.S. credit.  No other major U.S. credit-rating agency agreed with S&P’s decision, attesting to its “judgment call.”  Given today’s harsh economic realities, no one company should have the power to harm the stock market or the economy.  As Buffett points out, his company has no intent of liquidating some $48 billion in U.S. treasures.  He also made it abundantly clear that it’s not up to S&P to comment on Washington’s dysfunctional relationships.  Buffett still views U.S. credit as beyond AAA.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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